EUR/USD began the week quietly, trading in a tight range below the mid-1.1400s in Asia while staying close to the near two-week high set last Thursday. Geopolitical risk remains a factor: despite an interim US-Iran agreement, tensions around the Strait of Hormuz persist as Iran seeks tighter control of the route. That backdrop supports the safe-haven US Dollar and creates headwinds for the pair, although the move has been tempered by shifting US monetary policy expectations.
Markets pared back expectations for Federal Reserve tightening after weak US labour data. Nonfarm Payrolls showed 57K jobs added in June versus 110K expected, while May was revised down to 129K from 172K; the Unemployment Rate edged down to 4.2%. With Crude Oil prices slumping, inflation concerns have eased and expectations moved from one to two Fed hikes in 2026 to between zero and one. In Europe, softer Eurozone inflation reduced pricing for further ECB rate hikes. The calendar includes German Factory Orders, Eurozone Sentix, PPI and Retail Sales, followed by US ISM Services PMI and remarks from FOMC members.
Conflicting Forces Keep EUR/USD Range-Bound
We see the EUR/USD pair caught in a tight range below the 1.1450 level, reflecting a market where conflicting forces are at play. The weakness from softer Eurozone data is being offset by doubts about the Federal Reserve’s next move. This tug-of-war suggests that a strong directional trend is unlikely to emerge immediately in the coming days.
Given the conflicting signals, we believe implied volatility is probably being undervalued by the market. For instance, the Euro Currency Volatility Index (EVZ) recently touched 5.8, a level not seen since the first quarter, making option premiums relatively inexpensive. This presents an opportunity for traders to position for a potential breakout over the next few weeks without betting on a specific direction.
Volatility Strategies Take Focus Amid Uncertainty
We are factoring in the recent US Core CPI print of just 2.1% year-over-year, which supports the narrative of easing inflation and limits the Fed’s hawkish potential. Last week’s disappointing nonfarm payrolls of only 57,000 is a significant drag on the dollar. Therefore, any short-term dollar strength driven by geopolitical news is likely a selling opportunity.
On the other side of the pair, the Euro’s potential is capped by the European Central Bank’s dovish stance. With the latest flash estimate for Eurozone HICP inflation coming in at a tepid 1.9%, there is little pressure for the ECB to act at its upcoming July 25th meeting. This situation reminds us of the 2019-2020 period, where ECB inaction kept the single currency range-bound for extended periods.
Consequently, we are positioning for an increase in volatility rather than a specific direction in the near term. A long straddle strategy, which involves buying both a call and a put option with the same strike price and expiration, seems appropriate for the August expiration cycle. This approach profits from a significant price move in either direction, bypassing the need to predict which central bank’s policy will break the current deadlock first.
